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Annuities as an Asset Class for Fee-Based Advisors l 29 © Envestnet 2022 There is another way that lifetime income benefits can be structured that moves away from the hypothetical benefit base and the rollup rate. This alternative approach is more commonly found with FIAs, while the method just described is more common for variable annuities. In the alternate formulation, a lifetime withdrawal percentage, which is still defined by age bands, is determined at the time the GLWB is added to the annuity. In this case, it is the age that the benefit is purchased rather than the age that income begins. Then, rather than using a rollup rate with a benefit base, there is a deferral credit that increases the withdrawal rate for each year that the owner defers the start of their lifetime income distributions. When lifetime distributions begin, they are set as a percentage of the contract value at that time, where the percentage is rising over time on account of the deferral credits. For example, suppose a fifty-five-year-old purchases an FIA that includes this type of income rider. For this contract, the withdrawal percentage when purchased at fifty-five is 4.5 percent, and the deferral credit is 0.3 percent for each year that the individual delays the start of income. The individual plans to retire at age sixty-five, which would provide ten years of deferral. That would mean that the lifetime withdrawal percentage is 7.5 percent (4.5 + 0.3 x 10) of the contract value at that age. In this case, principal is protected only on a gross basis before the rider fee is applied at the end of each year. Principal would be protected in terms of zero interest being credited when the index lost value, but the optional benefit charge could then reduce the value of the principal. Moshe Milevsky has described the separate presentation of rollup rates and guaranteed withdrawal rates as telling consumers the temperature in Celsius when individuals can only make sense of temperatures provided in Fahrenheit. In this case, what a retiree will understand is the amount of income guaranteed by the annuity. It may not be immediately obvious to someone whether an annuity with a 5 percent rollup rate and 5 percent withdrawal rate is better than an annuity with a 4 percent rollup rate and a 6 percent withdrawal rate. Many consumers misinterpret the guaranteed growth rate on their benefit base as a guaranteed investment return, not realizing that it is the combination of a growth rate on the benefit base and the withdrawal rate applied to the benefit base that determine the level of guaranteed income. These two factors cannot be disentangled. A higher rollup rate combined with a lower payout rate does not necessarily leave consumers in a better position. For these reasons, the second deferral credit method is easier to understand and has a more direct correspondence to how the payout rate on a deferred income annuity increases with the length of deferrals. Annuities as an Asset Class for Fee-Based Advisors l 29 Many consumers misinterpret the guaranteed growth rate on their benefit base as a guaranteed investment return, not realizing that it is the combination of a growth rate on the benefit base and the withdrawal rate applied to the benefit base that determine the level of guaranteed income. © Envestnet 2022

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